03_December_23_Industrial Report_1400x598 (1)

Despite Record New Supply, National Industrial Vacancy Dips Below 4% 

Key Takeaways:

  • Despite record new supply coming online in 2022, the national vacancy rate contracted another 20 basis points from the previous month 
  • Strong demand also pushed national industrial in-place rent up 6.5% year-over-year to an average of $7 per square foot in November 
  • Single-market vacancy dropped most in Nashville, where the average rate tightened near to 1%
  • More than 742 million square feet of industrial space was under construction at the end of November 
  • Nearly $79 billion in industrial sales closed year-to-date, with the average sale price up 18% from 2021 
  • Inland Empire and Los Angeles were the only U.S. markets to post double-digit rent growth
  • Chicago claimed the top Midwest spot for new leases signed at an average of $7.41 per square foot  
  • New Jersey industrial lease spreads among the widest in the U.S.    

The industrial sector’s expansion maintained its 2022 momentum through November, as intense demand for industrial space continued to fuel dynamic rent growth. The national average rent for in-place leases reached $7.00 per square foot last month, according to the latest U.S. industrial market report from CommercialEdge.

The new development pipeline also continued to increase, undeterred by inflation-driven backlogs and bottlenecks along the supply chain. There were 742.3 million square feet of industrial space under construction at the end of November. And, despite record levels of new supply delivered in 2022, the national industrial vacancy rate contracted steadily throughout the year, reaching 3.8% in the same month. 

Rents and Occupancy: Record New Supply Can’t Keep Vacancy Rates from Falling

Industrial rent growth accelerated at a steady pace in top U.S. markets throughout the year, with national in-place rents for industrial space increasing 6.5% year-over-year. In November, the national average increased another five cents from the previous month, to reach $7.00 per square foot. 

For another consecutive month, port markets led the nation in both new leases and in-place rent growth. In line with trends observed during the previous two years, Southern California in-place rents have climbed at the fastest rate, driven by double-digit growth in the Inland Empire and Los Angeles markets. On the East Coast, Boston and New Jersey saw the strongest rent hikes. 

Average Rent by Metro

Tenants signing new leases are paying more than ever for space. The average rate of a lease signed in the last twelve months was $9.07 per square foot — $2.07 more than the average for all in-place leases. The markets with the highest premiums for new leases were in the West, where Los Angeles, the Inland Empire and Orange County dominated. Meanwhile, Nashville had the largest spreads in the South and Boston took the lead among northeastern markets. 

The national vacancy rate stood at 3.8% in November, following a decrease of 20 basis points from the previous month. While many of the supply chain issues from the beginning of 2022 eased in the second half of the year, finding suitable industrial space in port markets remains one of the biggest challenges, as vacancy rates were still tight in the Inland Empire, Los Angeles, and New Jersey. Rapidly expanding non-port markets such as Nashville and Columbus, where demand is outstripping supply, are also seeing extremely low industrial vacancy rates.  

Supply: Top Markets Dominate New Supply Pipeline

A total of 742.3 million square feet of industrial stock was under construction at the end of November, representing 4.0% of existing inventory. Moreover, data showed an additional 684.5 million square feet in the planning stages. With the national vacancy rate for the top 30 markets having dipped below 4%, space in the hottest markets is already pre-leased before delivery or, in some cases, before construction even begins. 

Industrial Space Under Construction (Million Sq. Ft)

While many markets are experiencing an industrial construction boom, much of the new supply being developed is concentrated in a handful of locations: Phoenix, Dallas - Fort Worth, the Inland Empire, Chicago and Houston account for more than a quarter of all under-construction space. Half of all under-development supply is in only 18 markets. 

Transactions: Sale Cool as Interest Rates Rise

While increasing interest rates have led to a tightening investment market in the second half of the year, year-to-date, a total of $78.8 billion in industrial sales were recorded nationally through November.

Rising interest rates have also impacted sales prices, with the average for an industrial property slipping to $127 per square foot (down 5.4%) in the third quarter and resting at $116 per square foot through the first two months of the fourth quarter. Even so, average sale prices were still well above 2021 levels, with the average sale price this year marking a 17.8% increase year-over-year. 

Year-to-Date Sales (Millions)

The leading markets in terms of industrial sales volume were Dallas, Los Angeles and the Inland Empire. These were the only markets to each surpass the $4 billion threshold year-to-date, recording a combined transaction volume of nearly $14 billion. Southern California still leads in terms of price per square foot, with year-to-date sales prices approaching $370 per square foot in one of the region’s hottest markets. 

Year-to-Date Sale Price Per Square Foot

Western Markets: The Inland Empire and Los Angeles Record Double-Digit Rent Growth 

Southern California's industrial rent growth remains firmly in the lead, with rents rising 13.8% in the Inland Empire and 10.7% in Los Angeles. The two Western markets were the only ones to record double-digit rent growth among the top 30 industrial markets CommercialEdge surveyed. But sharp rent appreciation is not limited to Southern California, as other Western regions are also experiencing a rapid rate of increase. Specifically, in-place rents for Phoenix industrial space rose 7.3% over year-ago figures, while Portland and the Bay Area gained 6.4% and 6.3%, respectively.  

As a result, Western U.S. industrial markets remain the most expensive in the country — $12.79 per square foot in Orange County, $11.91 per square foot in the Bay Area, and $11.85 per square foot for industrial space in Los Angeles. And with most Southern California markets seeing new leases signed at rates well over $10 per square foot, November saw new leases averaging $19.32 per square foot in Los Angeles, $18.06 per square foot in Orange County, and $14.50 per square foot in the Bay Area. 

Southern California markets also have some of the lowest industrial vacancy rates in the U.S., with the Inland Empire at just 1.2% — the second-lowest vacancy rate among the top 30 U.S. industrial markets. Los Angeles and Orange County had vacancy rates of 2.2% and 3.0%, respectively. Vacancy levels are expected to remain low due to demand far outstripping supply and the lack of land for sizeable industrial projects in these markets. 

Los Angeles had a little over 5 million square feet of industrial space under construction at the end of November, equal to only 0.7% of its existing stock, while planned projects are projected to add just 2.5% to the market’s inventory, resulting in a supply pipeline much behind market needs. Similarly, Orange County had a new supply pipeline of just 1.3% of its existing inventory, and the Bay Area’s under-construction pipeline accounted for just 2.4% of its stock. While construction activity is far more elevated in the Inland Empire, where nearly 30.7 million square feet of industrial space under development account for 5.0% of stock, these figures still fall short of market demand. The continued high demand indicates a buoyant industrial market outlook for Southern California in 2023.

West Regional Highlights

Elsewhere in the Western U.S., Phoenix had the largest supply pipeline on a stock basis and the second largest in terms of square footage, as industrial players pushed out of Southern California continue to flock to the Arizona market. Specifically, Phoenix had more than 52.5 million square feet of new industrial space under construction as of late November — the equivalent of 17.5% of its existing inventory. Adding planned projects to the mix more than doubled that estimate and boosts the pipeline by 36.3%. 

Meanwhile, the industrial sector has somewhat cooled in terms of sales, with the third quarter marking the first decline in the average sale price of an industrial property in two years. As of this report, the fourth quarter has seen a similar decline. However, average sale prices remained well above where they were last year.  

The highest sale prices were recorded in Southern California, with Orange County industrial properties trading for $369 per square foot, Los Angeles at $300 per square foot, and the Inland Empire at $295 per square foot.  

L.A. and the Inland Empire were also in the lead in terms of sales volume, claiming the second and third spots: Los Angeles closed $4.54 billion in industrial sales, followed by the Inland Empire with a sales volume of $4.43 billion. Industrial deals closed in Phoenix amounted to $3.1 billion. 

Midwestern Markets: Chicago Leads with Sales Volume Nearing $4B

Unlike port markets where space is limited for new projects, Midwestern markets with more generous zoning or geographic permissions, as well as a significant logistics presence, are rapidly expanding their inventory and keeping industrial rent growth moderate in the process.  

Detroit claimed the sharpest rent growth in the Midwest, with rents increasing 6.2% year-over-year, which ranked the market second-priciest for in-place industrial leases in the region at $6.13 per square foot, outpacing the Chicago rate of $5.59 per square foot. However, Chicago claimed the top spot in the Midwest for new leases with an average of $7.41 per square foot. Detroit ranked second for in-place contracts with an average rate of $6.62, followed by the Twin Cities at $6.30 per square foot. 

As for transactional activity, Chicago led the Midwest in industrial sales, with a total sales volume of $3.78 billion at the end of November. Three other markets also recorded strong sales year-to-date and surpassed the $1 billion mark: Indianapolis industrial sales totaled $1.19 billion; the Twin Cities saw sales amounting to $1.033 billion; industrial sales closed in Columbus followed close behind with a total of $1.031 billion. In addition, the Midwest competed with the South for the lowest prices per square foot, as only the Twin Cities exceeded $100 per square foot, while Chicago assets traded for an average of $87 per square foot. 

Midwest Regional Highlights

Development in Midwest markets is driven by some of the lowest vacancy rates in the country. Specifically, vacancy rates stood at 1.7% in Columbus and 2.5% in Indianapolis and Kansas City.  

Indianapolis had the second-largest construction pipeline in the region, with a total of 22.8 million square feet of industrial space underway, accounting for 6.8% of total stock in the market. Meanwhile, Columbus followed with 15.9 million square feet under construction, equal to 5.6% of local inventory. New supply in the Kansas City pipeline encompassed 11 million square feet, the equivalent of 4.2% of existing stock. When also considering planned projects, Indianapolis is looking at a 12.6% industrial market expansion, Columbus by 8.9% and Kansas City by 17.2%. 

Chicago had a vacancy rate of 4.1% at the end of November and the market led the Midwest in development activity. Chicago had more than 26 million square feet of industrial projects underway, accounting for 2.6% of its stock. Taking into account planned projects as well, the market is looking at expanding its industrial footprint by 6.3%. Among the Midwestern markets with more tempered development activity, the Twin Cities stood out for having a new supply pipeline of a little more than 6 million square feet, equal to 1.9% of its inventory. 

Southern Markets: Nashville Takes the Lead with Lowest Vacancy Rate in the U.S. 

The lowest vacancy rate among the top 30 U.S. markets we surveyed was recorded in Nashville — just 1.2% at the end of November. Atlanta, Miami, and Charlotte followed with 2.6%, 3% and 3.1%, respectively. In addition to Nashville, the latter three were the only other Southern markets to post vacancy rates below the national rate of 3.8%. On the other hand, Houston had one of the highest vacancy rates at 7.2%, both in the South and nationwide.      

In Southern markets with lower vacancies, industrial rent growth has been more robust and in line with the national average rate of 6.5%. Specifically, Atlanta led the South in terms of rate growth at 6.6%, closely followed by Nashville at 6.4% and Miami at 6.3%.

These gains also generated some of the widest lease spreads in the region, with Miami in the lead: While in-place rents averaged $9.72 per square foot here, new contracts signed over the past 12 months averaged $11.60. Nashville in-place rents stood at $5.52 per square foot, while new leases averaged $11.29 per square foot. New-lease rates in both Miami and Nashville exceeded Western markets such as Seattle and Portland, where new contracts were inked at a per-square-foot average of $10.30 and $10.18, respectively. 

The effect of higher vacancy rates in some industrial markets in the South was evident in more modest lease spreads. For example, Houston in-place rents stood at $6.15 per square foot, while new leases were signed at $6.17 per square foot. Similarly, Memphis had a 5.6% vacancy rate, a higher rate that can be correlated with the market’s lease premiums: In-place rents clocked in at $3.66 per square foot, while new leases were signed at $4.01 per square foot. Charlotte was the only outlier, with a relatively low vacancy rate (3.1%) and lower in-place rents ($6.26 per square foot) than in newly signed leases ($6.17 per square foot). 

South Regional Highlights

Dallas – Fort Worth remained home to the largest development pipeline in terms of square footage both in the South and across the country. At the end of November, the Dallas Fort Worth market had a new supply pipeline of 62.6 million square feet, which is set to boost the market’s already massive industrial footprint by 7.3%, the highest rate among Southern markets. Moreover, planned projects that have yet to break ground are projected to increase the market’s inventory by 12.8%.  

Houston, despite having a vacancy rate above the national average, has the second-largest development pipeline in the South with more than 26 million square feet of industrial space under construction, equal to 4.7% of stock. Additionally, the market is set to increase its square footage by 7.6% if planned projects materialize. 

In fact, many markets in the region don't have to contend with space constraints that port markets are faced with, resulting in significant development pipelines outside the Dallas and Houston markets. As of late November, Charlotte had a total of 14.1 million square feet of industrial space underway, representing 4.8% of its total inventory. Atlanta wasn’t that far behind, with a new development pipeline totaling 12.4 million square feet, equal to 2.3% of its industrial stock. 

In terms of sales prices, Houston was the priciest in the region, with a rate of $133 per square foot year-to-date. Tampa followed in second place, with $125 per square foot. The rate for Atlanta industrial space averaged $108 per square foot and ranked third. At the other end of the spectrum, Memphis industrial deals averaged the lowest year-to-date sale price among leading industrial markets — $60 per square foot. 

As for sales volume, Dallas continued to lead the region — and the country. In fact, its $4.71 billion year-to-date sales volume was the largest among the top 30 markets, while Houston’s $3.85 billion sales volume placed the market fourth, according to the CommercialEdge U.S. industrial market report.

Northeastern Markets: Philadelphia Set to Increase Industrial Square Footage by 5.3% 

In line with other port markets, New Jersey's vacancy rate contracted further, coming in at 2% and falling between the Los Angeles rate of 2.2% and Orange County's 3 %.  

Given strong demand and high occupancy rates, industrial rents in New Jersey have increased consistently, rising 8.9% year-over-year — the third-fastest rent growth rate nationwide. With in-place rents averaging $9.22 per square foot and leases signed over the previous 12 months averaging $13.36 per square foot, New Jersey had one of the widest industrial lease spreads in the U.S.  

While several major markets in the South saw new leases inked at lower rates than existing contracts, rates for new leases were higher in the Northeast's most significant industrial markets. For instance, Boston in-place contracts stood at $8.87 per square foot, while new leases averaged $13.13 per square foot — the only other new-lease average in the Northeast to exceed the $10 threshold along with New Jersey. This pattern persisted even in Philadelphia, where both new and existing leases stood below the national average. 

Northeast Regional Highlights

New Jersey’s $2.95 billion transaction volume, the seventh highest in the country, placed it at the forefront of Northeast markets. However, the year-to-date sales price of $175 per square foot here could not compete with the West's more vertical pricing. At $179 per square foot, Boston was home to the highest year-to-date sale price in the Northeast. However, Boston's $1.74 billion in industrial sales was exceeded by the $2.6 billion worth of Philadelphia industrial sales, which averaged $122 per square foot. 

Philadelphia led the Northeast in terms of new supply — the Pennsylvania market stood out with a 21.5 million-square-foot supply pipeline that accounted for 5.3% of total local stock. Considering planned projects, Philadelphia is looking at a market expansion of 13.3%, the third-largest growth rate among the markets we surveyed for this industrial property market report. Meanwhile, New Jersey had the second-largest new supply pipeline in the Northeast (13.2 million square feet), followed by Boston (6.5 million square feet) and Baltimore (4.8 million square feet). 

Economic Indicators: E-Commerce Share of Retail Sales on the Rise Again  

E-commerce sales continued to expand in the third quarter, according to the U.S. Census Bureau. There were $265.9 billion in e-commerce sales, which represented an increase of 3% quarter-over-quarter and 10.8% year-over-year.  

During the last four quarters, e-commerce sales amounted to more than $1 trillion. In the third quarter of 2022, e-commerce accounted for 18% of core retail sales (which excludes motor vehicles, their parts and gasoline) — a number that is roughly on par with the pre-COVID-19 trendline. 

Economic Indicators

In 2020, many believed that the pandemic had permanently shifted the e-commerce share of retail sales ahead by two to three years. However, that share began to fall as vaccines became available and businesses could gradually open again. After peaking at 20% in Q2 2020 (up from 14.2% in Q1), the share fell in five of six ensuing quarters, bottoming out at 17.6% in Q4 2021. Since then, e-commerce’s portion of core retail sales has slowly been on the rise again. 

Quarterly E-Commerce Sales

The 2020 e-commerce boom transformed the industrial market. As businesses have spent the last two years attempting to adapt to skyrocketing internet sales, its effects are still being felt today. The third quarter of this year saw an increase in e-commerce sales of 66.4% when compared to the first quarter of 2020, according to the U.S. Census Bureau. 

While recent quarters have seen a return to normal in e-commerce sales growth, supply networks have yet to fully recover from the shock of the pandemic. One of the main causes of inflation was backlogs and bottlenecks in the supply chain, and even as these pressures are subsiding, finding industrial space in key locations will remain challenging, industrial property outlooks show.

Amazon, anticipating that the e-commerce boom would continue, swiftly expanded in 2021 but scaled back this year after acknowledging it had been expanding too aggressively. The e-commerce giant has spent the second half of 2022 pausing projects, slowing hiring and subleasing space. Amazon also has big box retailers like Target and Walmart to contend with now. These companies were forced to play catch-up to Amazon when the pandemic hit and have since been attempting to leverage their physical footprints to do so. Both retailers have expanded delivery and in-person pick-up options and have begun using their stores as last-mile delivery centers. 

Data around the holiday shopping season has been mixed — Adobe Analytics reported record levels of online sales for Black Friday and Cyber Monday, but retail sales were down 0.6% in the month of November according to the U.S. Census Bureau. 

National New Supply Forecast (Square Feet)

CommercialEdge's industrial market outlook projects that, while it may not reach levels seen in 2020 again, e-commerce growth will continue to drive high levels of demand in the industrial sector for the foreseeable future. New supply has yet to meet demand, and even a potential recession is unlikely to cause e-commerce sales volume to fall. 

Download the complete December 2022 report for a full picture of how U.S. industrial markets fared in the first 11 months of the year, including insights on industry and economic recovery fundamentals.

You can also see our previous industrial reports.

Methodology

The monthly CommercialEdge national industrial real estate report considers data recorded throughout the course of 12 months and tracks top U.S. industrial markets with a focus on average rents; vacancies (including subleases but excluding owner-occupied properties); deals closed; pipeline yield; forecasts; and the economic indicators most relevant to the performance of the industrial sector. For a detailed methodology, download the full report using the link provided above.

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Timea is a senior writer covering CRE marketing, tech and real estate trends, as well as industry news in the U.S. Timea was previously a senior associate editor at Multi-Housing News and Commercial Property Executive and has an academic background in law. She has been working in the real estate industry since 2011. Reach her via email.

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